policy note: renewable energy procurement and design …

POLICY NOTE: RENEWABLE ENERGY

PROCUREMENT AND DESIGN OF AUCTIONS

SEPTEMBER 30, 2019

SUSTAINABLE ENERGY FOR PAKISTAN (SEP) PROJECT

Submission Date: September 30, 2019

Contract No.: AID-OAA-I-13-00028

Task Order: AID-391-TO-16-00005

Activity Start Date and End Date: August 3, 2017 to April 26, 2021

Submitted by: Tetra Tech ES, Inc.

1320 North Courthouse Road, Suite 600

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This report was produced for review by the United States Agency for International Development. It was

prepared by Tetra Tech ES, Inc. for the Sustainable Energy for Pakistan (SEP) Project.

POLICY NOTE: RENEWABLE ENERGY

PROCUREMENT AND DESIGN OF

AUCTIONS

SEPTEMBER 30, 2019

SUSTAINABLE ENERGY FOR PAKISTAN

(SEP) PROJECT

DISCLAIMER

This report is made possible by the support of the American people through the United States

Agency for International Development (USAID). The contents are the sole responsibility of the

Tetra Tech ES, Inc. and do not necessarily reflect the views of USAID or the United States

Government.

RENEWABLE ENERGY PROCUREMENT AND DESIGN OF AUCTIONS iii

CONTENTS

EXECUTIVE SUMMARY......................................................................................................... 5

1. INTRODUCTION ............................................................................................................. 9

1.1 BACKGROUND .................................................................................................................. 9

1.2 STATE OF RENEWABLE ENERGY DEVELOPMENT .................................................... 9

1.3 HISTORICAL PROCUREMENT PROCESS .................................................................... 10

1.4 KEY DOCUMENTATION AND TYPICAL TIMELINES FOR

RENEWABLE ENERGY PROJECTS ............................................................................... 10

1.5 ALTERNATE AND RENEWABLE ENERGY POLICY 2019 ......................................... 10

1.6 OBJECTIVES OF THE POLICY NOTE ........................................................................... 11

2. INTERNATIONAL EXPERIENCE ................................................................................ 12

2.1 FEATURES OF ENERGY AUCTIONS ............................................................................ 12

2.2 AUCTION DESIGN .......................................................................................................... 13

2.3 EVALUATION OF FEASIBILITY OF AUCTIONS ........................................................ 14

2.4 FORMATS OF AUCTIONS .............................................................................................. 14

2.5 AUCTION DESIGN ......................................................................................................... 15

2.6 SUMMARY OF GOOD PRACTICES IN AUCTION DESIGN ..................................... 17

3. CONSIDERATIONS FOR COMPETITIVE PROCUREMENT IN PAKISTAN ......... 19

3.1 RISK ALLOCATION AND MITIGATION ...................................................................... 20

3.2 AREAS THAT NEED TO BE REVIEWED AND ADDRESSED .................................... 21

3.3 TIMELINE FOR LAUNCHING THE AUCTION ............................................................ 22

4. RECOMMENDATIONS ................................................................................................. 25

5. REFERENCES AND BIBLIOGRAPHY ......................................................................... 28

ANNEX A: IMPLEMENTING RENEWABLE ENERGY AUCTIONS IN PAKISTAN .... 29

A.1 DISCUSSION NOTE ........................................................................................................ 29

A.2 WHAT ARE RENEWABLE ENERGY AUCTIONS? ...................................................... 29

A.3 PRINCIPLES OF AUCTION DESIGN ............................................................................. 29

A.4 AUCTION DESIGN PROCESS ........................................................................................ 30

A.4.1 EVALUATE FEASIBILITY OF AUCTIONS ....................................................................................... 31

A.4.2 EVALUATE AUCTION FORMATS .................................................................................................... 32

A.4.3 DESIGN AUCTION ............................................................................................................................... 33

A.4.4 CONDUCT THE AUCTION .............................................................................................................. 41

A.4.5 EVALUATE OUTCOMES ..................................................................................................................... 42

ANNEX B: ILUSTRATIVE COMPETITIVE RE PROCUREMENT PROCESS

FOR RE ---- BEST PRACTICES ADAPTED FOR PAKISTAN .......................................... 44

iv RENEWABLE ENERGY PROCUREMENT AND DESIGN OF AUCTIONS

ABBREVIATIONS & ACRONYMS

AEDB Alternative Energy Development Board

CfD Contract-for-difference

COD Commercial Operation Date

CPPA-G Central Power Purchasing Agency Guarantees Ltd.

DSICO Distribution Company (electricity)

EOI Expression of Interest

EPA Energy Purchase Agreement or Environmental Protection Agency (as per context)

EU European Union

FiP Feed-in-Premium

FiT Feed-in-Tariff

FX Foreign Exchange

IEA International Energy Agency

IRENA International Renewable Energy Agency

kW Kilowatt

kWh Kilowatt-hour

LOI Letter of Intent

MOE Ministry of Energy

MW Megawatt

MWh Megawatt-hour

NEPRA National Electric Power Regulatory Authority

NREL National Renewable Energy Laboratory

NTDC National Transmission and Dispatch Company

OECD Organization for Economic Co-operation and Development

PPA Power Purchase Agreement

PPIB Private Power & Infrastructure Board

PPRA Public Procurement Regulatory Authority (Pakistan)

PV Photo-Voltaic

RAM Renewable Auction Mechanism (California)

RE Renewable Energy

RES Renewable Energy Sources

RETD Renewable Energy Technology Deployment

REZ Renewable Energy Zone

RFP Request for Proposals

RFQ Request for Qualifications

SEP Sustainable Energy for Pakistan

UK United Kingdom

USAID United States Agency for International Development

USD United States Dollar

USEA United States Energy Agency

VRE Variable Renewable Energy

RENEWABLE ENERGY PROCUREMENT AND DESIGN OF AUCTIONS 5

EXECUTIVE SUMMARY

Preamble

The Government of Pakistan (GOP) is committed to the development of renewable sources of

energy in the country. In this regard, it has communicated its objective to increase the share of

renewable energy (RE)1 in the overall generation-mix from the current approximately 4% (by

installed capacity) to about 25% by 2025, and to 30% by 2030. A new “Alternative and Renewable

Energy (ARE)” policy is expected to be announced in the near future which is likely to amplify this

emphasis and set out an overall framework for the development of indigenous energy resources

especially solar, wind and bagasse-based power projects.

Creation of appropriate enabling conditions is necessary for mobilizing private investments in RE

development. International experience suggests that while there is no specific “one size fits all”

solution, there are, however, certain conditions that must be met and parameters that must be

adopted for the development of large scale RE deployment in any country. Increasing the share of

the RE projects in the overall generation-mix presents a number of issues that need to be addressed.

These include issues related to the physical and operational characteristics of RE such as variability,

intermittency, dispersed locations and so forth.

Globally a variety of policy options have been deployed to promote renewables. While different

countries may have their own unique features viz their power systems, geography and economies,

their experience can be a useful guide in not only developing RE policies but also can be applied at

operational levels.. RE policies may inevitably vary from country to country to reflect their

respective renewable resource potentials, current state of deployment, regulatory frameworks,

political priorities and fiscal constraints.

This document provides an overview of some of the key lessons learnt from global experience and

summarizes their relevance and applicability to Pakistan to facilitate the development of way forward

in the thematic area of RE Procurement and Design of Auctions.

Issue Analysis and International Experience

International experience has shown that auctions (or other variations of competitive procurement)

are an important mechanism for promoting the deployment of RE. As a market mechanism, auctions

enable governments to contract a pre-defined volume of energy at a competitive cost. When well

designed, the price competition inherent to the auction scheme increases cost efficiency and allows

price discovery of RE-based electricity, avoiding potential windfall profits and underpayments.

Auctions could be multi-stage and could be technology-specific or technology-neutral, although it is

very difficult to design an auction that is actually neutral to all technologies.

Successful auctions that meet the goals of both policymakers and society balance the trade-offs

between: (a) specific auction design elements and the electricity market design; and (b) the context

in which the auctions take place. There are three main types of auction formats2: the sealed-bid

auction, the descending clock auction, and the hybrid auction (used in Brazil).

The design features of auctions, namely the auction’s demand, qualification requirements, winner

selection, and investor risks and liabilities, strongly influence the price outcomes. Across the

different auction design elements, policy makers should carefully consider the inherent trade-offs

between potentially the most cost-effective outcome and other objectives. International experience

shows that auctions can only contribute to effective and efficient RE deployment if they are designed

to match the market environment in the area where the auction is conducted, taking into account

specific policy goals, the supply-demand situation of RE projects, the project pipelines in comparison

1 Excluding large hydro above 50MW

2 Lucas, Hugo, Rabia Ferroukhi and Diala Hawila (2013). Renewable Energy Auctions in Developing Countries. IRENA.

6 RENEWABLE ENERGY PROCUREMENT AND DESIGN OF AUCTIONS

to deployment targets, potential bidder structure, competitive positioning of bidders, risk of

collusion, experience of bidders and/or the auctioneer, and the level and quality of market and cost

information, among others.3

International experience shows that auctions can only successfully contribute to achieving effective

and efficient RE deployment if they are specifically designed to match the market environment in the

area where the auction is conducted, taking into account specific policy goals, the supply-demand

situation of RE projects, project pipelines in comparison to deployment targets, potential bidder

structure, competitive positioning of bidders, risk of collusion, experience of bidders and/or

auctioneer with previous auctions, level and quality of market and cost information, and more. The

review of literature suggests that the following practices be taken into consideration when designing

auctions:

• Adapt auctions to the specific situation

• Secure sufficient competition

• Secure Project realization

• Simplify and Streamline Procedures

• Provide clear, timely and all relevant available information to stakeholders

The Pakistan Context

Government of Pakistan is currently in the process of developing a revised RE policy and has

indicated its intent that future procurement would be through competitive bidding process. Recent

reforms in Pakistan provide now the context for moving forward to a more competitive

procurement through energy auctions for new renewable energy projects. RE procurement and

design of auctions in Pakistan is likely to be impacted by a number of factors as follows:

Macro-economic environment and state of the power industry: The macro-economic environment

and state of the power industry in Pakistan is of particular concern to the RE investors. It is faced

with balance-of-payment, foreign-exchange reserve, and country risk-rating challenges, and the

power sector is still in transition from a centrally-controlled to market-based industry. Unless the

real and perceived risks arising out of this situation are adequately addressed in the auction design,

investor-interest is expected to be limited. Different design elements should be combined to meet

the goals of the auction, according to the country’s specific requirements and characteristics as well

as the macro-economic realities.

Financial health of the power sector: Circular debt in the power sector and contribution of the

distribution utilities are significant impediments to investment. Unless a clear path towards the

resolution of the structural issues contributing to the phenomenon of circular debt are put in place,

investors are either likely to stay away or ask for substantial risk-coverage by the Government.

Interconnection arrangements: NTDC’s capacity to successfully integrate RE into the grid is of

particular concern for investors. Several projects have been delayed on account of its inability to

provide timely interconnection arrangements.

Quality of investors: Special attention needs to be placed on attracting quality investors under the

auctions to be launched in Pakistan in the future. Prior investor experience in RE project

development lowers operational and credit risks and increases the likelihood of successful

implementation (and ability to reach financial close based on investor track records).

3 Report: “Auctions for renewable energy support - Taming the beast of competitive bidding” Final report of the AURES

Project; 2017


Selected issues to be addressed: In order to enhance investor interest and assure the success of

auctions in Pakistan, following issues need to be addressed: (a) benchmark tariff-setting and approval

by NEPRA; (b) development of standardized transaction documents in conformance with the rules

and regulations of the relevant institution by AEDB; and (c) review of procurement process and

procedures, including an assessment of information technology (IT) requirements for reverse

auctions.

Recommendations

Development of institutional capacities: There is a need to dedicate resources to develop the

institutional capacities not only in the execution agencies but also in oversight and monitoring

agencies.

Inter-agency coordination: The coordination between MOE, AEDB, and provincial energy

departments, and NEPRA should be improved and institutionalized given the program complexity

envisaged. In this regard, coordination on the Federal- and Provincial sponsored on-grid RE projects

and the roles and responsibilities of relevant institutions should be clearly established.

Empowerment of procurement teams: It is critical that the procurement management team should

be capable and competent in managing transaction advisers and have a high degree of operational

autonomy. The team should It is crucial, that the team comprises professionals from both the private

sector and government officials. The procurement process often requires proof of numerous

consents and approvals at the all levels - national, provincial and municipal levels, and these should be

processed earlier and facilitated from the program’s early stages. The approval process should be

coordinated and streamlined.

Adequate resources and transaction advisors: Adequate funding is needed to hire expertise for the

design of the procurement program and its associated documentation and contracts. Funding can

come either directly from the government or from a loans or grants from development finance

institutions. What is needed is to secure expertise and experienced advice should be procured at

the design stage, as this is critical to the program's ultimate success. The benefits of low prices from

a well-designed auction justify the costs of hiring professional expertise to help design and run the

auctions. The ongoing costs of subsequent bid rounds may be covered by charging project

development fees to successful bidders.

Standardization of procedures and documents: A successful outcome of competitive tender requires

it to provide a level playing field, with including standardized (template) contracts and documents.

The tender documentation, including Request for Qualification (RfQ) or Request for Proposals

(RfPs), and their associated contracts, must be of the highest standard, based on international best

practice. They should also allocate risks appropriately. At a high level, the RfP requirements must be

carefully designed to filter out parties that are not financially, technically or legally capable of carrying

out the project as promised within the given timeframe. Contracts should be standardized, and non-

negotiable and bankable.

Technology-specific versus technology-neutral competitive tenders: It may be possible to run a

multiple technology competitive tender for multiple technologies, using the same tender

documentation with common qualification and evaluation criteria, as well as certain technology-

specific requirements and contracts (for example, technology-specific PPAs). However, it is

proposed that initially in Pakistan, there may be technology specific tenders and then after a first few

rounds, competition between technologies is held. As Pakistan goes forward, it may be possible that

multiple technology tenders are used for revealing relative market prices, which will reveal those

technologies which have the greatest promise for cost and price reductions. In the medium- to long-

term, it is recommended Pakistan may consider embarking on technology-neutral auctions.


Programmatic approach to tenders – size for the first round: The size of individual projects

permitted should be capped to encourage more competition and to reduce buyer risk through a

diversified seller base. No specific size (MW) is being proposed, as it would be dependent on the

timing of the auction. However, this cap must not be so low that it prevents projects from achieving

economies of scale that would reduce bid prices. There is a tension between designing an auction

that incorporates economies of scale and seeks lowest prices and one that also seeks maximum

participation by smaller local project developers. The creation of a competitive environment should

be balanced with local, broad-based procurement.

Multiple-bid rounds: Multiple bid rounds, with smaller capacity blocks should be made available for

tender. One of the most important lessons from international experience is that there is value in

running sequential auctions at regular intervals, and capping the power capacity that is auctioned in

each auction or bid round. This stimulates competition and drives down tariffs by ensuring that

demand (from bidders) exceeds supply (that is auctioned) in each round. The capacity on offer,

though, should not be so small as to discourage investor interest. Multiple bid windows are

attractive because to bidders because the perceived a greater chance ‘higher chance’ of being

awarded a project at some point, knowing that there will be several rounds of capacity on offer,

encourages more investors to participate. Multiple bid rounds also allow for lessons to be learned

and improvements to be made to streamline and refine the tender documentation and legal

contracts with each bid round. It is thus recommended that Pakistan to start with smaller capacities

to be tendered based on such criteria such as location, grid availability, and required demand, etc.

and then gradually ramping up the program through larger capacity offerings in later rounds.

Interconnection: Grid connection planning must be coordinated with the RE program. This is

especially relevant in Pakistan given issues relating to power evacuation and interconnection, in the

recent past and where transmission constraints have delayed and frustrated the RE project

development of RE projects. It may be beneficial for project sites to be limited to specific zones

where transmission capacity is or would be in place, or could be strategically upgraded to serve

numerous.

Land acquisition: It is recommended that the government plays a facilitation role in site selection and

acquisition of land for RE projects by the private investor. The acquisition is proposed to be on fair

market value.


1. INTRODUCTION

This document is part of Task-8 of SEP work plan for FY19, and the objective is to: (a) analyze

selected policy issues that may impede the development of renewable energy (RE) resources in

Pakistan; (b) bring global best practices in renewable energy policies to develop pros and cons for

feasible options; and (c) present a limited set of recommendations related to policies that are

important for least-cost renewable energy development in Pakistan. This work could be used by the

Government to consider policy options that specifically support large-scale development of the

renewable energy industry.

A series of Policy Notes are being developed under this Task, as follows:

• Value of Variable Renewable Energy (VRE) and Impact on the Power System.

• Renewable Energy Procurement and Design of Auctions.

• Location of Renewables and Renewable Energy Zones (REZs).

• Renewable Energy Market Development.

This Policy Note provides an overview of RE Procurement and design of auctions and specification

of the enabling framework.

1.1 BACKGROUND

The Government of Pakistan and its agencies including the Ministry of Energy (MOE) and Alternative

Energy Development Board (AEDB) had earlier requested assistance on competitive procurement /

bidding process for Renewable Energy (RE) projects. Sustainable Energy for Pakistan (SEP) had

accordingly earlier provided assistance through the:

• Organization and facilitation of a 5 days workshop in Bangkok, Thailand in late 2017 –

supported by the U.S. Agency for International Development (USAID) and the United States

Energy Association (USEA). The focus of the workshop was to introduce participants to

reverse power auctions and identify best practices, as well as provide them with the

institutional and human capacity required for designing, managing, and operating a power

trading entity on the national scale4. The training served as a follow-up to the Pakistan Clean

Energy Business Opportunities Conference, held in December 2015 in Washington, DC.

• Presentation to the then Minister for Power and MOE in early 2018 on the prerequisites for

conducting energy auctions in the country. The presentation highlighted the requirements

and the illustrative steps in this regard.

• Sharing of information with AEDB on the design of auctions and competitive procurement.

This included working group discussions with AEDB and other stakeholders on the enabling

framework and international experiences for competitive procurement / auctions. The first

of such discussion took place in May 2019 wherein the global experience for RE

development was shared.

1.2 STATE OF RENEWABLE ENERGY DEVELOPMENT

The renewable energy market in Pakistan to date has largely evolved through unsolicited projects for

utility-scale on-grid capacity5. The Government had solicited under Renewable Energy Policy 2006

4 The delegates included representatives from Pakistan’s Ministry of Energy, Alternative Energy Development Board,

Private Power Infrastructure Board, and provincial energy departments. The workshop also enabled participants to

interact with speakers from South Africa and Brazil on conducting reverse power auctions

5 Notwithstanding the on-grid RE development, about 25MW of RE distributed generation capacity through Net

Metering has been installed in Pakistan during the last 3-4 years.


and received proposals for about 8,000 MW of RE capacity (mostly solar, wind and bagasse) in the

past which have been divided into four categories in accordance with the stage of project

development. Categories I and II projects (about 1,500 MW), where either the Letter of Support

has already been provided or the financial-close is imminent (advanced transactions) are being

actively pursued. For the remaining projects (about 6,500 MW), the Government has announced its

intention to undertake a competitive process to procure a pre-determined RE capacity in keeping

with the electricity demand and ability of the transmission system to absorb the Variable Renewable

Energy (VRE).

1.3 HISTORICAL PROCUREMENT PROCESS

Pakistan had historically adopted Feed in Tariffs (FITs) by technology-type which included a

standardized template for energy purchase. For example, National Electric Power Regulatory

Authority (NEPRA) wind FITs were established at USc 6.75/kWh (foreign financing) and at USc

7.73/kWh for projects funded through local financing. The process followed by the sponsors of RE

projects entailed a number of steps as broadly described in the following description. AEDB and the

provincial energy departments issued Letters of Intent (LOI) to private sponsors for establishing the

viability of RE projects including conducting the feasibility studies, technical analysis, environmental

assessments and commercial considerations. Also, the sponsors followed up with NEPRA for a

generation license and tariff setting, pending the AEDB and energy departments’ approvals. Upon

NEPRA approval of the generation license and determination of the tariff, the developer submitted a

performance guarantee. At the same time and upon completion of these steps, both for solicited

and unsolicited projects, a Letter of Support was issued either by AEDB or the provincial energy

departments, and the sponsors could then proceed to negotiate with the lenders and financially-

close the project with different participating stakeholders.

1.4 KEY DOCUMENTATION AND TYPICAL TIMELINES FOR

RENEWABLE ENERGY PROJECTS

The key documents during the past procurement included the Energy Purchase Agreement (EPA),

the Implementation Agreement and the site sublease for land acquisition if the land was allocated by

the AEDB and / or the provincial governments. The timeline envisaged for the process was

approximately 18 months (for the completion of the feasibility study, the National Transmission and

Dispatch Company (NTDC) approval of grid interconnection study and power purchase consent,

the environmental study and the approval by the provincial Environmental Protection Agency (EPA),

and the award of tariff and generation license by NEPRA, finalization of arrangements between the

sponsor and lenders to complete the requirements for financial close). However, in practice, the

overall project preparation process typically took a lot longer than the originally anticipated 18

months.

1.5 ALTERNATIVE AND RENEWABLE ENERGY POLICY

The Government of Pakistan is currently in the process of developing a revised RE policy and has

indicated its intent that future procurement would be through competitive bidding process.

Internationally, the implementation of competitive procurement through energy auctions have over

time demonstrated major reduction in costs and time, building upon the maturity of the markets and

management and technology innovations. Recent reforms in Pakistan provide now the context for

moving forward from FiTs to a more competitive procurement through energy auctions for new

renewable energy projects.


1.6 OBJECTIVES OF THE POLICY NOTE

This note endeavors to provide guidance on the overall framework for competitive bidding for RE

projects and some insights with respect to:

• Policy and processes to make RE procurement lower in cost, more competitive and simpler.

• Approaches for the preparation of bid documents.

• Auction designs to allow price and cost improvements during the bidding process.

• Imposition of specific performance and operational obligations on RE generators to deal with

the impacts of RE on the system.

• Potential obligation on RE generators to pay for and maintain their own transmission

interconnection, and advisability of including the interconnection cost in the bid-price so that

the full cost of RE generation can be determined.

• Establishment of capacity and price caps to ensure timely transmission additions needed for

RE projects.

• Design of auction series including regular auctions to help build the market and in keeping

with the demand and transmission system absorption capability.


2. INTERNATIONAL EXPERIENCE

International experience shows that renewable energy auctions (or other variation of competitive

procurement) are a policy tool and market mechanism for promoting the deployment of RE. As a

market mechanism, auctions enable governments to contract a pre-defined volume of energy at a

competitive cost. When well designed, the price competition produced by the auction mechanism

improves cost-efficiency and enables price discovery of RE based electricity generation. Despite

difficulties in implementation – auctions are especially context specific and no one model is

applicable to all circumstances - RE auctions have become the most common method for large-scale

procurement of renewable generation capacity, with at least 67 countries implementing RE auctions

in 2017. Since 2010, the Bloomberg New Energy Finance Auctions Database records 267,000 MW of

renewables procured in a total of 726 separate auctions worldwide.

Renewable energy auctions are also known as “demand auctions” or “procurement auctions”,

whereby the government issues a call for tenders to install a certain capacity of renewable energy-

based electricity. Project developers who participate in the auction submit a bid with a price per unit

of electricity at which they are able to realize the project. The government evaluates the offers on

the basis of the price and other criteria and signs a power purchase agreement (PPA) with the

successful bidder.

Auction schemes have benefited from the rapidly decreasing costs of renewable energy technologies,

the increased number of project developers, their international exposure and know-how, and the

considerable policy-design experience acquired over the last decade. When well designed, the price

competition inherent to the auction scheme increases cost efficiency and allows price discovery of

renewable energy-based electricity, avoiding potential windfall profits and underpayments. While

auctions have become very attractive, they largely benefit the successful bidders and tend to favor

relatively large players that are able to afford the associated administrative and transaction costs.

Based on national energy plans as well as the size and maturity of the renewable energy market, the

design of auction schemes reflect each country’s priorities in terms of technology, volume and

location. Technology-specific auctions allow for the promotion of certain technologies and

diversification of the portfolio. In addition to selecting the technology, auctions can be site-specific.

The identification of sites with ideal resources and secured grid connection potentially reduces risks

to investors. Technology neutral auctions have also served to promote renewable energy

technologies, which have even been able to compete with fossil fuels on certain occasions. The

design of auctions allows governments to include other national priorities, the most common one

being local content requirements.

2.1 FEATURES OF ENERGY AUCTIONS

Instrumental to the design of auctions are stringent bidding requirements (financial, environmental,

grid connection, etc.) and strong compliance rules (penalties, bid bonds, project completion

guarantees, etc.) that reduce the risk of underbidding, project delays and project failure.

As with other deployment policies and support mechanisms, the successful implementation of

auctions relies on an appropriate regulatory and institutional framework, relevant skills and adequate

infrastructure to attract investors. In designing and implementing auction schemes, policymakers may

want to consider the following elements:

• Type of auction format to be employed: The most common type of auction is the sealed-bid

auction. In a sealed-bid auction, participants submit their bids simultaneously and are

unaware of the competitors’ bids. The auctioneer ranks and awards projects until the

cumulative volume is equal to the volume being auctioned. The sealed-bid auction is simple,

easy to implement, fosters competition and avoids collusion. Descending clock auctions are

more difficult to implement, but they allow for a fast price discovery as well as greater

transparency.


• Ceiling price disclosure: Greater competition is ensured if the ceiling price is disclosed to

the bidders upfront.

• Auction volumes and bidding rounds: The size of the procurement volume may be

determined in relation to the capacity of the market to deliver electricity to the customers.

Determining the optimal number of rounds and the volumes that create greater competition

is a challenge that requires learning by doing.

• Bidding procedures: Streamlined administrative procedures, with communication and

transparency provided equally to all bidders, are essential to the success of an auction

scheme.

• Guarantees and penalties: Strong guarantees and penalties are essential to the success of

auction schemes, preventing potential underbidding and minimizing the risk of project delays

and completion failure.

2.2 AUCTION DESIGN


between: (a) specific auction design elements and the electricity market design; and (b) context in

which the auctions take place. In general, auction design is under-pinned by these broad principles:

• The auction scheme should result in RE at the lowest feasible cost and greatest efficiency.

• Auctions should be designed to meet the objectives of the government and

utilities/purchasers that are procuring renewable energy.

• Auction design must be consistent with the broader market context, allocating risk

efficiently among auction participants so that auction trade-offs do not favor one participant

or class of participants (i.e. investors, government, rate-payers) over another.

• Auctions should deliver the required level of RE deployment in the targeted timeframe;

accepted bids must be credible and have a high likelihood of achieving completion on time.

• The auction arrangements should be transparent, open, predictable and objective, earning

broad investor confidence.

• Auction arrangements should minimize market distortions and facilitate market

development.

• Electricity markets and contexts are constantly and rapidly changing. As more auctions are

held, new innovations, previous design flaws and/or unintended consequences may emerge.

Auction administration and design therefore need to be flexible.

Although auction design elements are not universally applicable, most countries follow a somewhat

similar process to implement RE auctions, which comprises of the following steps:

• Evaluation of feasibility of auctions.

• Formats of auction:

Sealed-bid auction.

Descending clock auction.

Hybrid auction.

• Auction design:

General design elements.

Auction procedure.

Conditions of participation.


Deadlines and penalties.

Institutions.

• Implementation and conducting the auctions.

• Evaluation of outcomes.

A summary of good practices in auction design is provided in the following paragraphs. Further

details of the above steps, including the design elements, key options, and considerations for

choosing a particular option, are provided in the succeeding paragraphs and in Annex A.

2.3 EVALUATION OF FEASIBILITY OF AUCTIONS

International experience demonstrates that the Government needs to clearly establish the policy

objectives for the development of RE in the short-, medium- and long-term, and take cognizance of

the market and regulatory environment upfront before launching any auction. In most cases, RE

development is motivated by bulk-generation supply cost reduction through the globally-declining

cost of RE but may include other policy objectives such as ascertaining the true cost of generation by

different technology type (cost discovery) or balancing the development of different sources of

renewable energy (generation-mix diversification) in relation to resource endowment in the country.

An important policy consideration is the socio-economic development of different parts of the

country as RE projects typically spurs economic activities and creates jobs. The Government needs

to also have a clear understanding of the size of the market and the volume of RE capacity that could

be absorbed by the transmission system in the short-term. Market-sounding events can enable the

Government to identify the universe of interested investors and their concerns with the regulatory

environment prevalent in the country. Literature on auctions has shown that preparatory work

relating to an evaluation of the feasibility of auctions, undertaken by a Government-designated entity,

goes a long way in establishing the robust competitive framework in a country.

2.4 FORMATS OF AUCTIONS6

There are three main types of auctions: the sealed-bid auction, the descending clock auction and the

hybrid type of auction (used in Brazil) where the first phase operates as a descending clock auction

then the second phase operates as a pay-as-bid sealed-bid auction.

Sealed-Bid Auction:

In the sealed-bid auction, bidders simultaneously submit their bids with an offer of price and quantity,

and no bidder is envisaged to know the offered price of the other participants. Bids that meet all of

the mandatory requirements outlined in the call for tenders are ranked from the lowest to the

highest price if the evaluation is based on the price only. According to the government’s priorities,

there is a possibility to rank projects not only according to price, but also to include a more

comprehensive set of criteria, such as the project’s contribution to local industrial development, the

project developer’s technical expertise, etc.

The selection of bids can take place in one or two phases. In a single-phase sealed-bid auction, no

pre-qualification exercise is undertaken and all interested investors are allowed to bid. However, in

the two-phase selection process, an initial pre-qualification in the first phase is undertaken to identify

bidders who would be allowed to tender. Pre-qualification is used in certain cases (large projects

and those requiring technical expertise) and it helps narrow the field to only those who have the

technical and financial capability to comply with the terms of the contract. In the second phase, pre-

qualified bidders submit bids which are then evaluated.

6 IRENA_Renewable_Energy_Auctions_in_Developing_Countries.,2013 Hugo Lucas, Rabia Ferroukhi and Diala Hawila


Descending Clock Auction:

The descending clock uses multi-round bids where the auctioneer announces a price for acquiring

the RE electricity generated. Bidders bid for the right to provide the quantity of RE electricity they

wish to supply at the going price announced. The auctioneer progressively lowers the price (which

results in a lower quantity offered from bidders) until the quantity offered matches the quantity to

be procured. This is a more dynamic auction system where participants know each other’s bids and

adapt their price and quantities accordingly in subsequent rounds.

Hybrid Auction:

A hybrid can be used as in the case of Brazil. This describes an auction where the first phase

operates as a descending clock auction then the second phase operates as a pay-as-bid sealed-bid

auction. In this case, the use of a hybrid auction aims at taking advantage of the benefits of both

auction systems: price discovery in the descending clock auction and avoidance of collusion between

small numbers of participants for setting the final price in the sealed-bid auction.

2.5 AUCTION DESIGN 7

For renewables to achieve their full potential, the auction design needs to be adapted to the specific

conditions of the country, which include: the economic situation, the structure of the energy sector,

the maturity of the power market and the level of renewable energy deployment. In addition, the

design of the auction needs to be aligned with the country’s overall objectives, which may go beyond

the achievement of deployment rates at minimum costs. Although there is no doubt that auctions

have improved the price competitiveness of renewables, a full understanding of the factors that have

contributed to the recent prices is essential to making well-informed decisions regarding future

auction design.

The prices attained in recent auctions are influenced by several factors; some relate to the auction

design and others to an enabling environment, including:1) country-specific conditions and access to

finance; 2) investors’ confidence related to the presence of a conducive environment; and 3) the

presence of other policies aimed at supporting renewable energy development.

Costs of renewable energy projects may be affected by policies adopted to support the development

of renewable energy. In the United States, for example, investment tax credits have been offered to

attract investments in solar PV projects, reducing investment costs by about 30 percent, a reduction

that has been reflected in the price outcomes. Access to finance considerations are largely related to

the variations in the weighted average cost of capital, reflecting both the country’s financing

conditions (the cost of debt) and investors’ perception of the risks of owning renewable assets in the

country (the cost of equity). These factors explain many of the country-to-country differences in

auction prices. Investors’ confidence can be strengthened by a stable, enabling environment that is

conducive to market growth through a clear target backed by a strategy and policy actions. For

instance, the commitment of the Government of India to its ambitious solar target of 100 GW by

2022, coupled with strong policy action, has given project developers, financing institutions and

other market participants confidence in the country’s solar program, despite challenges faced in

some states related to off-taker credibility. Off-taker risks are common in emerging economies and

they strongly influence the risk perception among investors. These risks can be mitigated by ensuring

that demand-side responsibilities will be met by offering additional guarantees to back the contract, if

needed. In Argentina, the government provides liquidity guarantees ensuring the continuity of cash

flow to the developers as well as termination guarantees shielding developers from counterparty

risks that are also backed by the World Bank. The impact of investors’ confidence on the price

outcomes is mainly illustrated by countries where accumulated experience from recurring auctions

has resulted in persistently lower prices (e.g., South Africa and India). A long-term auction program,

with a predictable schedule of auction demand, and a high degree of transparency all contribute

positively to the level of competition in the auction

7 IRENA_Renewable_Energy_Auctions_2017.


The design features of auctions, namely the auction’s demand, qualification requirements, winner

selection, investors’ risks and liabilities, all strongly influence the price outcomes. Across the

different auction design elements, policy makers should carefully consider the inherent trade-offs

between potentially the most cost-effective outcome and other objectives. Some important

considerations are as follows:

• When the objective is to develop a particular technology, a technology-specific auction can

be selected. If the goal is minimizing costs, a technology-neutral auction can be introduced,

allowing competition between technologies (e.g., Brazil). When the objective is to meet

urgent capacity needs while retaining flexibility in holding auctions, the total volume can be

auctioned at once, through a standalone auction. If the objective is to further enhance

investors’ confidence for a more cost-effective outcome, the total volume auctioned can be

divided into different rounds in a systematic auctioning scheme. This facilitates long-term

planning by policy makers, bidders, and equipment suppliers, which may be beneficial to the

grid planning and to the country’s renewable energy industry. If the objective is to meet

broader development goals, the auction design can include additional selection criteria. Local

content requirements, for example, can support the domestic industry, job creation and

other socio-economic benefits. Such requirements are most effective when aligned with

other design elements, such as a long-term auction schedule, and applied with other

supporting policies.

• Qualification requirements are key determinants of the competition in the auction and the

prices offered by developers. They can be focused on 1) ensuring that the project will

deliver as per the contract by requiring bidders to conduct assessments and obtain permits

as a prerequisite to be able to bid, and 2) ensuring the capability of the developer to

successfully deliver the project through technical, financial and reputational requirements.

• The criteria for selection, ceiling prices and limits on project size can significantly impact the

price outcomes, with the possibility of facing the trade-offs. While a simple winner selection

process based solely on the price can improve cost competitiveness, other objectives can be

achieved by incorporating non-monetary criteria, such as socio-economic benefits and

project location.

• When the main objective is to ensure cost effectiveness, a low ceiling price can be set, above

which bids are not considered. However, there is a risk that a sub-optimal amount of

renewable energy will be contracted, as it could lead to the rejection of some reasonable

bids. Experience has shown that keeping the price ceiling undisclosed can help increase cost

effectiveness, but at the risk of disqualifying potentially good projects that are just above the

ceiling (e.g., early auctions in Peru). Disclosing the ceiling price in auctions where

competition is not fierce might result in equilibrium prices right below the ceiling (e.g., the

first round in South Africa).

• A limit on the project size or on the volume that can be won by one bidder also impacts the

price. Such measures were put in place in Zambia to diversify the portfolio of generators and

reduce risks in case projects do not materialize. Auctions that have no limit on project size

can benefit from economies of scale, as in the case of Dubai and Abu Dhabi in the United

Arab Emirates, where 800 and 1,170 MW of solar was contracted respectively, at record-

breaking prices.

• Appropriate Risk Allocation between the public and private sectors is a critical element in

the auction design. In determining the sellers’ liabilities in the PPA, there are various ways to

allocate financial, operational and production risks between the project developer, the

auctioneer and the off-taker. Trade-offs that need to be considered in the allocation of risks

and liabilities to developers include:


o Auction design features can limit the developers’ risks resulting in lower prices, but

these risks would then be passed on to the off-taker. Currency, inflation and production

risks can be reduced through auction design. In Chile, contracts are denominated in U.S.

dollars and indexed to U.S. inflation, protecting developers from currency exchange and

inflation risks. In addition, the newly introduced hourly supply blocks protect generators

from production risks, reducing exposure to spot energy prices in case of deviation from

the contracted amount. This is one of the factors that led to the record-breaking low

solar prices in Chile’s 2016 solar auction.

o Liabilities can be reduced to encourage participation and increase competition, but at

the risk of facing project delays or underproduction. Investor liabilities involve

commitment to contract signing and project completion as well as compliance rules and

penalties. These are important measures to ensure that projects are developed as per

schedule to meet the capacity needs of the power sector. However, if these measures

are too strict, competition in the auction will be reduced, leading to higher prices.

2.6 SUMMARY OF GOOD PRACTICES IN AUCTION DESIGN 8

International experience shows that auctions can only successfully contribute to achieving effective

and efficient RE deployment if they are specifically designed to match the market environment in the

area where the auction is conducted, taking into account specific policy goals, the supply-demand

situation of RE projects, project pipelines in comparison to deployment targets, potential bidder

structure, competitive positioning of bidders, risk of collusion, experience of bidders and/or

auctioneer with previous auctions, level and quality of market and cost information, and more. The

optimal auction design for a single implementation therefore may be very different from the optimal

auction design for a different market or even time period. The review of literature suggests that the

following practices with benefit be taken into consideration when designing auctions:

Adapt auctions to the specific situation:

• Auction design needs to match the current market environment and policy goals.

• Auction design needs to be flexible and be updated often to accommodate changes in

market situation and policy goals and to correct for previous unwanted incentives.

Secure sufficient competition:

• Attract as many serious, true-cost bids as possible, by carefully choosing appropriate auction

designs.

• Ensure a large enough pool of similarly strong bidders.

• Implement participation enhancing measures including an active communication strategy,

stakeholder consultations, on draft specifications, well in advance of bid preparation.

Secure Project realization:

• Ask for binding bids.

• Implement both pre-qualification requirements and penalties (especially material pre-

qualification regarding project development stage and bid bonds).

8 Report D9.2, December 2017 Auctions for renewable energy support - Taming the beast of competitive bidding Final

report of the AURES Project


Simplify and Streamline Procedures:

• Define clear and simple selection criteria.

• Avoid too harsh or confusing rules (such as stringent timelines, difficult to obtain

documentation, etc.).

• Use sealed format auctions and consider pay-as-bid pricing if bidders and/or auctioneer are

inexperienced, little cost or market information is available, and the competitive situation is

uncertain.

Provide clear, timely and all relevant available information to potential investors:

• Avoid uncertainty by missing or unclear information that leaves room for interpretation

and/or speculation by bidders.

• Publish a transparent and continuous auction schedule.

• Implement cost-based ceiling prices (acts also as a safeguard in case of low competition / too

few bids).

• Prioritize stakeholder consultations.


3. CONSIDERATIONS FOR COMPETITIVE

PROCUREMENT IN PAKISTAN

International experience suggests that competitive procurement mechanisms, such as auctions, can

procure RE at lower prices if there is significant interest from investors and thus a high degree of

competition. Policy makers, therefore, need to address barriers to the development of RE posed by

the broader policy and regulatory framework. Policy consistency and predictability have significant

influence on private-sector investment decisions. Having competitive bidding may also be an effective

tool for real price discovery but should also be flexible in the auction design, and tailored to the

specific context and country objectives.

Based on international experience, when selecting design elements, policy makers in Pakistan should

carefully consider the inherent trade-offs between potentially the most cost-effective outcome and

other objectives, keeping in mind the following lessons:

• In defining the auction’s demand, ambition for a greater role of renewables in the energy mix

must be weighed against objectives and cost and system effectiveness. For example, if the

goal is minimizing costs, a technology-neutral (if feasible when weighed against complexity)

auction can be introduced, allowing competition between technologies, therefore favoring

the more tested and cost-competitive ones.

• If the policy objective is to further enhance investors’ confidence for a most cost-effective

outcome, the total volume auctioned, if considerable, can be divided into different rounds in

a systematic auctioning scheme, with a cap on the volume auctioned in each round. This

facilitates long-term planning by policy makers, bidders, and equipment suppliers, which may

be beneficial to the country’s renewable energy industry and for the grid planning and

development by NTDC.

• In establishing the qualification requirements, there is a trade-off between reducing entry

barriers to encourage competition and discouraging potential project implementation issues

i.e. allowing the participation of a large number of bidders while ensuring that they can

successfully deliver the project. This requires a careful selection of qualification

requirements which should as a minimum cover technical credentials (prior experience of

putting-up and operation of a RE project of a certain size (MW) and financial capability (a

balance-sheet commensurate with the size of the RE project being bid).

• If the objective is to also meet broader development goals, policy makers can include

additional selection criteria. Local content requirements, for example, can support the local

industry, job creation and other socio-economic benefits, but should not result in any

significant adverse impact on the commercial and financial viability of the project. Such

requirements are most effective when aligned with other design elements, such as a long-

term auction schedule, and applied with other supporting policies.

• While a simple winner selection process provides greater transparency, some degree of

complexity may have to be implemented to ensure that other objectives of the country are

achieved by the auction. For example, if the objective is to reach the lowest price using a

simple and straightforward procedure, policy makers can choose to adopt the classical

minimum-price criteria for the selection of a winner. However, other objectives can be

achieved by incorporating non-monetary criteria, such as socio-economic benefits, location,

developer’s experience etc. In such cases, the process of evaluation of other non-monetary

elements of the bid must be provided to all bidders upfront and should leave little or no

room for discretion. The process of inclusion of non-monetary factors may, however, result

in higher prices and a more complex mechanism.


• When the main objective is to ensure cost effectiveness, policy makers can also set a ceiling

price above which bids are not considered. However, if the ceiling price is not calibrated

properly, there is a risk that a suboptimal amount of renewable energy will be contracted, as

it could lead to the outright rejection of certain perfectly reasonable bids. Experience has

shown that keeping the price ceiling undisclosed can help increase the cost effectiveness of

the scheme but at the risk of disqualifying potentially good projects that are just above the

ceiling.

• If though out properly, incorporating the REZs concept in auction design can be a useful tool

in sharing interconnection and grid enhancements costs with potential investors of RE

projects.

• Battery energy storage systems (BESS) are becoming a cost-competitive flexibility provider.

Building these as part of required services in auction is possible but may require

modifications to policy, market and regulatory frameworks to accelerate BESS deployment

and ensure these resources can participate in the power system to provide flexibility

services.

• Developers might be subject to risk, but they should not be subject to uncertainties. The

risk allocated should be clearly communicated, should be transparent, fully quantifiable, and

enforced. Protecting possible bidders against uncertainties is key to gaining their confidence.

• Policy makers need to consider evaluating the process at the end of each bidding round as it

is important to factor lessons learned into the design of the following rounds.

• Administrative procedures should be simplified, streamlined and facilitated when possible

(permits, grid connections, etc.). Setting up a one-stop-shop could help minimize transaction

costs and efforts of the bidders, preventing delays in project implementation.

• The time, resources and skills needed to process the auction modalities have to be carefully

estimated.

3.1 RISK ALLOCATION AND MITIGATION

Policy makers should minimize the investors’ perceived risk through an institutional and regulatory

framework that ensures a predictable and stable environment for investments. A good auction

design is not enough in a market in which the levels of skepticism and lack of credibility is high.

Following are some of the significant aspects requiring consideration:

• Macro-economic environment and state of the power industry: There is no “one-size-fits-

all” formula for successful auctions9. Different design elements should be selected and

combined in a way that is tailored to meet the goals of the auction, according to the

country’s specific requirements and characteristics. While determining which auction design

best fits the specific context, policy makers should take the following types of constraints

into account: (a) those arising from the macro-economic conditions (local and global); (b)

the state and characteristics of the power sector in Pakistan; and (c) the quality of

equipment and lack of enforcement of standards are significant concerns in the Pakistani RE

marketplace.

9 Comparison of prices from bidding processes in other countries to Pakistan may not be appropriate as it is not an

“apples to apples comparison”. For example, in Government in UAE offered many subsidies (like provision of land and

site preparation), bore much of the operational risk, provided clear RE long term energy mix targets with supportive

policy, had a very strong country risk rating, and provided a 60-40 transaction structure where the sovereign owned

40% of the project through the municipality which essentially create a credit enhancement – all of which reduced

project developer risks to enable a world record low price. Given the greater risk perceptions and lack of an enabling

environment in Pakistan these prices cannot be recreated in Pakistan. Who bids and at what price depends very much

on the country, access to affordable finance, and project risk profile.


• Quality of investors: Prior developer experience in RE project development lowers

operational and credit risks and increases likelihood of successful implementation (and ability

to reach financial-close based on track record of the investor).

• Near absence of long-term integrated planning: Lack of long-term electricity supply and

demand forecasting, and sector-wide integrated energy plan, is a significant issue for RE

developers.

• Interconnection arrangements: Ability of NTDC to successfully integrate RE into the grid is

of particular concern for all investors, and several projects have been delayed on account of

inability to provide timely interconnection arrangements.

• Policy and regulatory framework: Consistency of policies, regulations, and terms of the

transaction deals is a major concern. A competitive process with full transparency, and

symmetry of information to all bidders, would minimize this risk going forward.

• Financial health of the power sector: Circular debt and Distribution Company (DISCO) role

are impediments to investment, along with current Pakistan macroeconomic situation/recent

depreciations of currency/depleting Foreign Exchange (FX) reserves, and country risk rating.

3.2 AREAS THAT NEED TO BE REVIEWED AND ADDRESSED

Approval and Tariff-setting by NEPRA: As sole power market regulator, NEPRA has been

determining tariffs for generation, transmission and distribution since 1998. It draws its powers from

an establishing document, “National Electric Power Regulatory Authority (Tariff Standards and

Procedure) Rules, 1998”. Renewable energy projects are categorized as “Solicited” or “Unsolicited”.

The government requests proposals for solicited projects from investors based on predefined

specifications by conducting a competitive bidding. This practice has been carried out in the thermal

power sector, for which the Private Power Infrastructure Board (PPIB) has conducted multiple

international competitive calls for coal and other thermal projects since 2008. In the renewables

sector, AEDB has not yet solicited any projects but several projects are in an advanced stage of

development. However, NEPRA issued directives in January 2017 for future utility-scale wind and

solar Photo-voltaic (PV) projects to undergo a competitive bidding process as solicited projects.

NEPRA set a benchmark tariff for wind projects in January 2017 and instructed AEDB and other

relevant agencies to initiate competitive bidding. For solar PV projects, no benchmark tariff has been

determined either by NEPRA or any other agency. For these auctioning rounds, NEPRA requires the

process to be developed in line with the NEPRA Competitive Bidding (Approval and Procedures)

Regulations 2014.

Development of Transaction documents: A review is required from Transaction and Legal

consultants to assess the existing framework, the requirements of auction and draft template

transaction documents including the Request for Proposals (RFP) and Requests for Qualification

(RFQ) Documents. This will require adapting international best practices10 as and/if appropriate for

Pakistani conditions. It will also necessitate resolving the following items:

• Ensuring conformity between the selected auction mechanism with Public Procurement

regulatory Authority (PPRA) rules and NEPRA regulations. In the event of any

inconsistencies, AEDB will need to facilitate the necessary approvals from the relevant

authorities.

• Should the Government of Pakistan (GOP) decide to pursue multi-stage bidding processes,

sequencing to get there in what manner and by when will be equally important. Rules and

regulations need to be developed and put in place for this situation.

10 Globally, countries have announced their intent to hold an auction process for procurement of RE anywhere between

1 -2 years prior to the actual launch of the RFP and/or bid process.


Process and Procedural Issues: Multi variable and multi stage auctions and reverse action process

have not been tried in Pakistan before. The lack of experience, capacity and real time information

exchange require serious review of such process to ensure transparency and equity. Reverse

auctions around the world have used Information Technology systems, especially for multi-stage

auctions. The NEPRA Power Acquisition Programs (Standards and Procedures) Rules, May 2017

prima facie appear to be unclear on multi-variable, multi-stage or reverse auctions. Also, the skills,

capacity, the infrastructure (such as appropriate Information Technology systems) and importantly

the familiarity and acceptability are not yet in place.

The afore-mentioned NEPRA Rules, May 2017 require that competitive bidding be conducted

keeping in view the “demand forecasted by national grid company in accordance with the least cost

generation plan of each DISCO.” Given lack of consensus in the marketplace on power demand

forecasting, it needs to be defined what methodology and institutional framework will be used.

3.3 TIMELINE FOR LAUNCHING THE AUCTION

Based on global experience, a realistic schedule needs to be drawn for initiating the competitive

bidding processes taking into account the logical sequence of activities in different stages of a typical

auction. In a number of situations, the process has been hurried with some unwelcome results.

Table 1 presents an illustrative overall timeline for the different stages of an auction process.

Annex B presents an illustrative but more detailed schedule for launching different activities for an

auction. The following paragraphs describe the activities broadly associated with transaction

inception, due diligence and structuring, implementation of the procurement, award and post-

competition stage.

Table 1: Indicative Timeline for Competitive Procurement Process in Pakistan

(months)

Different Stages of a

Typical Auction 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

1 Inception Stage

2 Due Diligence and Transaction

Structuring Stage

3 Procurement Stage

4 Bid Award Stage

5 Post-Procurement Stage

Inception Stage Activities:

AEDB may take the lead to undertake inter alia the following activities during the inception stage:

a. RE grid integration arrangements, plan, and necessary pre-auction approvals.

b. Clarity on the competitive arrangements — long-term contract, take or pay provisions,

finalization of arrangements with Central Power Purchase Agency Guarantees Ltd.

(CPPA-G) as market operator, aggregators least cost generation dispatch, etc.

c. Location and site selection and required Federal/Provincial/Local approvals.

d. Choice of technology and/or quality criteria.


e. Needs/options assessment, which determines the supply and demand of electricity, cost-

benefits, and Strength-Weakness-Opportunities-Threat (SWOT) analysis of the auction.

All the preceding activities are pre-requisites for the decision to launch an auction and should be

followed by: (a) development of a Concept Note in parallel to RFP as per normal Pakistani process;

decision/approval in principle to conduct auction; and disclosure of pre-feasibility/preparatory studies

already done by AEDB; and (b) announcement of the intent to issue RFP for the auction and the

associated timeline (international practice is at least 1 year in advance).

Due Diligence and Transaction Structure Stage:

During this stage, analysis / assessments need to be undertaken by the investor, as follows:

a. National and regional demand analysis, supply assessment, and supply-demand balance.

b. Grid-integration study and seeking necessary approvals from NTDC/DICO or other

relevant entity.

c. Environmental and social community assessment and obtaining necessary approvals.

d. Viability and/or feasibility analysis including technical, commercial, financial and

legal/regulatory conformance to RE development framework.

AEDB may undertake the following analysis and propose specific measures for Government

approval:

a. Market and affordability assessment including customer profile, willingness-to-pay survey,

and safety nets – this is international best practice in deregulated market.

b. Description of the bidding process and seeking necessary decisions: (i) aims, goals, and

strategies; (ii) minimum eligibility rules for bidders; (iii) contract lengths and desirability

of the use of standard PPAs/EPAs; (iv) approvals for taxation, subsidies, and other

incentives for bidders, to be mentioned in the RFP; (v) price rule for the auction e.g.

initial bid price, 'clearing price’, floor price consideration, and concerns about windfall

profits; (vi) proposed billing and payment process; and (vii) lead time between bidding

process technology-wise and when capacity must be delivered.

c. Development of the bidding format and auction design customized for local conditions:

bidding documents, regulations, rules, processes, procedures, schedule and timing of

bids.

The GOP (Ministry of Energy) should review and approve all key provisions of the competitive

process and authorize AEDB to launch the auction on its behalf. In completing the due diligence,

following key points may be kept in mind:

• If reverse auctions are chosen/allowed by the Government, then as per international

practice, this may require development of necessary Information Technology systems for

real-time bids by AEDB.

• Timely dissemination of requisite project and auction information is crucial. There is a

trade-off between amount of information to publish in advance of competitive bidding to

reduce barriers to entry but caution must be exercised to prevent collusion, and ensure

competition.

• Ensure competition between new and existing RE resources and should guide timing of

bidding processes and length of RE contracts.

• Formal Announcement of intention to hold auction and call for EOIs, along with

dissemination of RE targets, key projects, and bidding mechanism can gauge market interest.


Procurement Stage:

Management of the RE procurement process is envisaged to be the prime responsibility of AEDB,

and would comprise of the following concurrent and sequential activities: (a) issuance of Preliminary

Information Memorandum (PIMS) and invitation for submission of EOI/queries; (b) PIMS to be

followed by Road Show; (c) development of RFP including soliciting feedback on pre-qualification

criteria, collateral rules, etc.; (d) public outreach and publicity; (e) pre-bid meeting after EOI

announcement; (f) issuance of draft RFP (including security package and incentives for project

developers and penalties i.e. bid bonds, underperformance penalties, etc.; EPA/IA etc.); (g) post-draft

RFP pre-bid meetings; (h) finalization of pre-qualification criteria, bidding process structure and

bidding rules, and completion of final RFP; and (i) issuance of the final RFP to solicit bids (with a

minimum of 30 days response time).

The draft and final RFP need to be submitted to NEPRA to seek regulatory approvals. The winner

selection rules, procedures, and processes have to be also approved by competent authorities, and

consistency with the PPRA rules and regulations has to be ensured. Bids are received from the pre-

qualified bidders (who have been issued the RFP) and opened in front of the duly-authorized

representatives of the bidders for evaluation.

Bid Award Stage:

At the bid-award stage, the risk mitigation instruments and affordable financing mechanisms need to

be finalized so as to enable an expeditious financial-close by the winning bidder. Based on the bid-

evaluation criteria, the winner is identified, and necessary approvals obtained before the issuance of

provisional award letter(s). Execution of security package and incentives for project developers, as

well as review of EPA/Implementation Agreement is also completed in this stage.

Post-Procurement Stage:

The post-procurement and award stage is marked by the following activities: (a) Finalization of the

Implementation Agreement after award; and (b) financial close by the bidder/investor. This stage

also initiates the monitoring and evaluation process, and enforcement of rules, regulations and

procedures.


4. RECOMMENDATIONS

The most important aspect for consideration while designing a competitive procurement of RE in

the context of Pakistan relates to (i) the institutional readiness and capacities and (ii) infrastructure

and resource availability. The Government needs to focus and facilitate procurement of resources to

develop the institutional capacities not only in the execution agencies but also strengthen oversight

and monitoring agencies. Investments are also required for requisite strengthening of infrastructure

in terms of absorption and dealing with the operational issue of VRE. While not being prescriptive,

broad recommendations for designing and implementing competitive a competitive procurement for

RE projects is provided below for consideration:

Establishing the validity of Auctions

The Government should task AEDB to undertake the preparatory work to clearly articulate the

policy objectives and review the overall policy and regulatory environment in close consultation with

the potential investors. AEDB should also organize market-sounding events where the policy

framework and the impending design of the competitive process is discussed with private investors.

Coordination

The Coordination between MOE, AEDB and provincial energy departments and NEPRA should be

improved and institutionalized given the complexity envisaged. In this regard, coordination on the

Federal and Provincially-sponsored on-grid RE projects and roles and responsibilities of respective

institutions should be clearly established.

Empowerment of procurement teams

Critically, the procurement management team/entity should be capable and competent in managing

transaction advisers and have a high degree of operational autonomy. It is crucial, that the team

comprises professionals from both private sector and government officials. The procurement

process often requires proof of numerous consents and approvals at all levels - national, provincial

and municipal and these should be processed earlier and facilitated from the early stages of the

program and should coordinate and streamline their approval processes. The procurement team

should also tap into the cumulative knowledge and the lessons learned from the disposition of the

Wind and Solar projects in Category III, once the process has been implemented.

Adequate resources and transaction advisors

Upfront and adequate funding is necessary to hire expertise for the design of the procurement

program and its associated documentation and contracts. Funding can come either directly from

GOP or from a loan or grant from development finance institutions. What is needed is to secure

expertise and experienced advice at the design stage, as this is critical to the program's ultimate

success. The benefits of low prices from a well-designed auction justify the costs of hiring

professional expertise to help design and run the auctions. The ongoing costs of subsequent bid

rounds may be covered by charging project development fees to successful bidders

Standardization of Procedures and Documents

GOP is recommended to provid a level playing field including standardized contracts and documents.

The tender documentation including RFQ and RFPs, and associated contracts, must be of the highest

standard, based on international best practice and should allocate risks appropriately. At a high level,

the RFP requirements must be carefully designed to filter out parties that are not financially,

technically or legally capable of carrying out the project as promised within the given timeframe.

Contracts should be standardized and non-negotiable and be bankable. Documents currently under

preparation by AEDB (RFP, EPA, and the Implementation Agreement) for the disposition of wind

and solar projects under a competitive process can also be used as a starting point to advance and

shorten this work.


Technology-specific versus technology-neutral competitive tenders

It may be possible to run a multiple technology competitive tender, using the same tender

documentation with common qualification and evaluation criteria, as well as certain technology-

specific requirements and contracts (for example, technology-specific PPAs). However, it is

proposed that initially AEDB may initiate technology-specific tenders and gain experience on

auctions, and then after the first few rounds, organize competition between technologies. As

Pakistan goes forward, it may be possible that multiple technology tenders are used for revealing

relative market prices and which technologies show the greatest promise for cost and price

reductions. In the medium- to long-term, it is recommended Pakistan embark on technology-neutral

auctions.

Programmatic Approach to Tenders – Size for the first round

The size of individual projects permitted should be capped by AEDB to encourage more competition

and to reduce buyer risk through a diversified seller base. No specific size (in MW) is being

proposed as it would be dependent on the absorption capacity, market appetite and other factors

such as supply and demand situation, incumbency of existing PPAs etc. at the time of the auction.

However, this cap must not be so low that it prevents projects from achieving economies of scale

that would reduce bid prices. There is a tension between designing an auction that incorporate

economies of scale, seek lowest prices, and also seek participation by local developers (due to their

smaller financial capabilities). The creation of a competitive environment should be balanced with

local, broad-based procurement.

Multiple bid rounds

There is value of running sequential auctions at regular intervals and capping the power capacity that

is auctioned in each auction or bid round. This is likely to stimulate competition and drive down

prices by ensuring that offers (from bidders) exceed supply (that is auctioned) in each round.

Multiple bid windows are expected to be attractive to bidders because the perceived ‘higher chance’

of being awarded a project at some point, knowing that there will be several rounds of capacity on

offer. Multiple bid rounds would also allow AEDB to learn the lessons and improve the process on

the government side, as they are able to streamline and refine the tender documentation and legal

contracts. It is therefore recommended to start with smaller capacities to be tendered based on

criteria such as location, grid availability, required demand etc. and then gradually ramping up the

program through larger capacity offerings in later rounds.

Interconnection

Grid Connection planning by NTDC must be coordinated with the RE program. This is especially

relevant in Pakistan given the numerous issues relating to power evacuation and interconnection in

the recent past and where transmission constraints have delayed and frustrated the development of

RE projects. The development of RE resources, in most countries, implies a reconfiguration and

strengthening of the grid. A RE procurement program needs to be complemented with an adequate

transmission planning and investment program. It would be beneficial for project sites to be limited

to specific zones where transmission capacity is or would be in place or could be strategically

upgraded to serve numerous projects (wind and solar power projects can be concentrated in

specific geographical areas where investments in transmission grid by NTDC will be concentrated).

Land

A key design feature is whether government or private parties choose the project sites. This

question is relevant in Pakistan given the problems with land access and acquisition. It is

recommended that the government plays a facilitation role in selection of sites and its availability and

performs some of the preparatory work prior to the tender. Acquisition of land should be

encouraged by private-developer to be based on fair market value, so as to minimize community

unrest or dissatisfaction.


Technical Standards

Where possible, the technology components for power generation must either be internationally

certified (by prescribed certification bodies) or comply with relevant international best practice

standards. This is not to say they cannot be locally manufactured, provided they meet international

standards of acceptable design. Alternatively, certain components should exhibit a "proven

reliability". A credible mechanism for the enforcement of technical standards for the RE projects also

needs to be instituted.


5. REFERENCES AND BIBLIOGRAPHY

• Michael Hochberg & Rahmatallah Poudineh, Renewable Auction Design in Theory and

Practice: Lessons from the Experiences of Brazil and Mexico, April 2018.

• IRENA (2017), ‘Renewable Energy Auctions: Analysing 2016’. IRENA, Abu Dhabi. ISBN 978-

92-9260-008-2.

• Renewable Energy Auctions: A Global Overview: Report 1: Energy and Economic Growth

Research Programme May 2018 Version 1.1 Wikus Kruger, Anton Eberhard & Kyle Swartz

Management Programme in Infrastructure Reform and Regulation (MIR).

• Recommendations for the Design of Successful Renewable Energy Auctions or Competitive

Renders in Africa --- Anton Eberhard and Raine Naude.

• Mora Alvarez, D. F., Kitzing, L., Soysal, E. R., Steinhilber, S., del Río, P., Wigand, F., ...

Woodman, B. (2017). Auctions for renewable energy support - Taming the beast of

competitive bidding. Aures

• IRENA and CEM (2015), Renewable Energy Auctions – A Guide to Design.

• IEA-RETD (2016), RE TRANSITION – Transitioning to Policy Frameworks for Cost-

Competitive Renewables, [Jacobs et al., IET – International Energy Transition GmbH], IEA

Technology Collaboration Programme for Renewable Energy Technology Deployment (IEA-

RETD), Utrecht, 2016.

• IRENA, IEA and REN21 (2018), ‘Renewable Energy Policies in a Time of Transition’. IRENA,

OECD/ IEA and REN21.

• Lena Kitzing,, Vasilios Anatolitis, Oscar Fitch-Roy, Orinna Klessmann, Jane Kreiss, PabloDel

Rio, Fabian Wigand, Bridget Woodman. “Auctions for Renewable Energy Support: Lessons

Learned in the AURES Project”, IAEE Energy Forum / Third Quarter 2019.

• Competitive Selection and Support for Renewable Energy, Policy Guidelines Prepared jointly

by the European Bank for Reconstruction and Development and the Energy Community

Secretariat in collaboration with the International Renewable Energy Agency March

2018IRENA (2018), Renewables Readiness Assessment: Pakistan, International Renewable

Energy Agency (IRENA), Abu Dhabi.

• IRENA_Renewable_Energy_Auctions_in_Developing_Countries.,2013 Hugo Lucas, Rabia

Ferroukhi and Diala Hawila.

• The Procurement Process, Melbourne Renewable Energy Project.

• Procurement Options for New Renewable Electricity Supply Claire E. Kreycik National

Renewable Energy Laboratory Toby D. Couture E3 Analytics Karlynn S. Cory National

Renewable Energy Laboratory, 2011.

• Fabian Wigand, Ana Amazo, Ecofys, RES auctions – Insights for the Energy Community

Presentation at IRENA – Energy Community Workshop on Renewable Energy Auctions.

2017.


ANNEX A: IMPLEMENTING RENEWABLE

ENERGY AUCTIONS IN PAKISTAN

A.1 DISCUSSION NOTE11

This discussion note reviews recent analysis and research on renewable energy (RE) auction design12

and highlights global lessons on auction implementation. The purpose of the note is to facilitate

dialogue and elicit comments from public and private sector stakeholders on moving the RE auction

process forward in Pakistan by addressing the following leading-questions:

• Evaluate auction feasibility: The government of Pakistan’s Cabinet Committee on Energy

(CCOE) has already approved a first competitive procurement program with the specific

objective to advance under-development RE projects stalled by a previous CCOE decision in

2017. Following this mandatory first-round, what target objectives would subsequent RE

auctions achieve? Are auctions a suitable mechanism for long-term RE support in Pakistan,

given the country’s current electricity market and regulatory context?

• Select auction format: Which competitive procurement or auction format is best-suited

to Pakistan’s local market context and auction objectives?

• Select auction design elements: Which design elements should be included (e.g. size or

technology eligibility, auction procedure, participation eligibility and penalties etc.)? What

parameters should be applied to each element? Which institutions will be involved in the

process as a result of the selected auction design specifications?

• Conduct auction: Which institutions will bear responsibility for conducting the auction?

Are the required procurement documents, such as request for quotation (RFQ), request for

proposal (RFP) and PPA etc. available? Do the designated institutions have the capacity to

conduct auctions and execute contracts?

A.2 WHAT ARE RENEWABLE ENERGY AUCTIONS?

Renewable energy auctions (or other variation of competitive procurement) are a policy tool and

market mechanism for promoting the deployment of RE. As a market mechanism, auctions enable

governments to contract a pre-defined volume of energy at a competitive cost. When well

designed, the price competition produced by the auction mechanism improves cost-efficiency and

enables price discovery of RE based electricity generation. Despite difficulties in implementation –

auctions are especially context specific and no one model is applicable to all circumstances - RE

auctions have become the most common method for large-scale procurement of renewable

generation capacity, with at least 67 countries implementing RE auctions in 2017. Since 2010, the

Bloomberg New Energy Finance Auctions Database records 267,000 MW of renewables procured in

a total of 726 separate auctions worldwide.

A.3 PRINCIPLES OF AUCTION DESIGN


between specific auction design elements, and the electricity market design and context in which the

auctions take place. In general, auction design is under-pinned by these broad principles:

11 Implementing Renewable Energy Auctions in Pakistan: Discussion Note: SEP (Dr Allen Eisendrath & Ermeena Malik)

12 Michael Hochberg and Rahmatallah Poudineh, “Renewable Auction Design in Theory and Practice: Lessons from the

Experience of Brazil and Mexico” (Oxford Institute for Energy Studies), April 2018; IRENA and CEM, “Renewable Energy

Auctions - A Guide to Design,” 2015; IRENA, “Renewable Energy Auctions: Analyzing 2016” (Abu Dhabi: IRENA, 2017);

Hugo Lucas, Rabia Ferroukhi, and Diala Hawila, “Renewable Energy Auctions in Developing Countries” (Abu Dhabi: IRENA,

2013); Silvana Tiedemann, “Renewable Energy Auction Design,” Open Electricity Economics (OEE); Fabian Wigand et al.,

“Auctions for Renewable Energy Support: Lessons Learnt from International Experiences” (AURES, June 2016).


• The auction scheme should provide support to RE at the lowest feasible cost and greatest

efficiency.

• Auctions should be designed to meet the objectives of the government and utilities that are

procuring renewable energy.

• Auction design must be consistent with the broader market context, allocating risk

efficiently among auction participants so that auction trade-offs do not favor one participant

or class of participants (i.e. investors, government, rate-payers) over another.

• Auctions should deliver the required level of RE deployment in the targeted timeframe;

accepted bids must be credible and have a high likelihood of achieving completion on time.

• The auction arrangements should be transparent, open, predictable and objective, earning

broad investor confidence.

• Auction arrangements should minimize market distortions and facilitate market

development.

• Electricity markets and contexts are constantly and rapidly changing. As more auctions are

held, new innovations, design flaws and unintended consequences emerge. Auction

administration and design therefore need to be flexible.

A.4 AUCTION DESIGN PROCESS

Although auction design elements are not universally applicable, most countries follow a similar

design process to implement RE auctions:

Figure 1: Auction Design and Implementation process13

13 Adapted from Ana Amazo, “Renewable Energy Auction Design,” (2016).

3. Auction design 4. Implementation1. Feasibility

evaluation2. Format

Selection

Define policy goals and

objectives

General design elements

Procurement procedure

Conditions for

participations

Evaluate auction formats Develop auction design Conduct auction

Deadlines and Penalties

Institutional setup

Drafting of required

documents

Market building

Procurement conduction

(RFP, RFQ, bid award)

Contracting

Monitoring of realization

5. Evaluation

Evaluate outcomes

Conduct market and

regulatory assessment

Market size

Pre-developed projects

Market players

Technology costs

Project development and

operations

Existing regulations and

incentives

Compare auction

schemes

Evaluate qualitative

parameters

Evaluate quantitative

parameters

Evaluate static and

dynamic efficiency

Lessons learned

Adjust auction design

and/or process

Stakeholder consultation and feedback


A.4.1 EVALUATE FEASIBILITY OF AUCTIONS

Activity Options Key Considerations

Define policy goals Common policy objectives

include:

Cost reduction. The most

common policy objective is

to lower the cost of

renewables. There are

however several different

dimensions of this objective:

Reduce the overall system

cost by selecting least

expensive projects, stabilize

or reduce the overall budget

that is allocated for

renewables, incentivize cost-

efficiency through

competitive pressure, and

support technological

learning and progress.

Cost discovery. Closely

related to cost reduction is

the objective to discover the

real cost of renewables. In

this case, auctions can

overcome the information

asymmetry between project

developers and the

government: developers can

estimate the amount of

support they need much

better than the government.

Volume control. A third

prominent policy objective is

to control or influence the

overall volume and type of

technology that is being built

(e.g. through technology

specific auctions)

Other objectives. Other

policy objectives include a

positive socio-economic

impact, a regional and

technological distribution

that is in line with planned

grid infrastructure or

resource dispersion, project

size and technology diversity

in the auction, job creation,

attracting foreign direct

investment and incentivizing

research and development.

• Policymakers should develop and publish

a strategy for the development of

renewable energy, including: long-term

plans that identify targets for renewable

energy generation (for example, looking

10 years ahead); and short-term plans

identifying the auctions that will deliver

the target for the coming two to three

years.

• Plans should be developed with a view to

promoting a viable long-term RE market

that is of a sufficient scale to interest

market participants and can be easily

integrated in the competitive electricity

market.

• Long-term targets should be consistent

with any international obligations and be

part of an integrated energy and climate

policy planning framework.

• The strategy for implementing plans

should be consistent with the legal

framework in the country e.g. public

procurement and competition laws etc.

Conduct a market and

regulatory analysis

An analysis of the

• Market size

• Stage of project

development

• What is the potential market size? How

much RE is the government looking to

procure and over what time-frame?



market situation and

regulations is crucial for

determining the

appropriate auction type

and selecting the right

design elements (see

Section 3 for more

detail)

• Market participants

• Technology costs

• Existing regulations and

incentives

• Project development and

operations

• Existing infrastructure

• Is the auction targeting early or late stage

development? (See Section 3.1 for more

details on project stage criteria)

• Who are the market players? Although

auctions have been applied to support

small- (France) to medium-scale

technologies (California), and do not per

se exclude smaller players, experience

shows that large and experienced project

developers win the largest share of the

auctioned capacities or energy. If size

diversity is a policy objective,

governments might consider size-specific

auctions (e.g. in France and Taiwan).

• What are the technology costs?

• Will the existing regulations and

incentives support effective RE auctions?

• Is the existing infrastructure in the

country appropriate for project

development in locations with high RES

potential? Weak or insufficient

infrastructure can negatively affect the

efficiency (e.g. in Portugal) and

effectiveness (e.g. in Brazil) of auctions.

A.4.2 EVALUATE AUCTION FORMATS


• Analyze and compare

international auction

schemes and identify

best practice or

mechanism best-suited

to Pakistan.

• Evaluate options with

quantitative and

qualitative parameters

(e.g. policy goals,

volume and location

of energy to be

procured etc.)

• Identify a successful

bidding strategy.

• Static Auctions: Also known

as sealed bid auctions.

Include first-price and

second-price, pay-as-bid or

pay-as-clear auctions. Most

countries use this auction

format.

• Dynamic Auctions (also

known as iterative

auctions): Include ascending-

clock and descending-clock

auctions.

• Hybrid Auctions: Multi-

phase auctions with a mix of

at least one static and one

dynamic phase.

• Administrative costs: The sealed-bid

auction is simple, easy to implement,

fosters competition and avoids collusion.

Descending clock auctions are more

difficult to implement, but they allow for a

fast price discovery as well as greater

transparency.

• Market situation; pay-as-bid pricing

may disadvantage small project

developers, as profits largely depend on

the bidder’s capacity to accurately

estimate the clearing price. Large

developers, which often enjoy significant

resources and experience, may guess

clearing prices more precisely than their

smaller counterparts. Auction design that

limits actor diversity could have long-term

implications for the market and the sector

as a whole, as providing a level playing

field between large and small participants

would be more likely to lead to the

inclusion of both, which has positive

implications for competition and

innovation. Pay-as-bid pricing can also

limit actor diversity due to favoritism for

market incumbents and low pricing.

• Project structure for each technology



type.

• Assess past experience with energy

auctions and their outcomes.

A.4.3 DESIGN AUCTION

A.4.3.1 GENERAL DESIGN ELEMENTS

Design elements Options Key Considerations

Selection of project

locations and sites • Government site e.g.

Tanzania (Hydro), UAE,

Morocco, Zambia. Includes

Renewable Energy Zones

(REZs) or designated areas

for RE development e.g. in

Texas (US), Turkey and

South Africa

• Bidder site e.g. South Africa

(REZ), Mexico, Chile,

Tanzania (solar and wind)

Government site auction: If sites are

pre-developed by the auctioning

authority (single item auction), care must

be given to provide correct information

in order to avoid unnecessary risks for

bidders. Pre-development by the

auctioneer might include:

• Grid connection

• Land lease

• Environmental assessments

• Resource measurements

Bidder site: Bidders compete with their

projects and pre-develop their projects,

e.g.:

• Defining site boundaries

• Measuring resource availability

• Procuring land lease

• Ensuring grid connection: Grid

connection risk borne entirely by the

bidder, exposes bidder to considerable

financial risk

The government or auctioneer can set

location constraints, even under the

bidder-site model to meet policy goals

such as regional quota, achieve greater

geographic diversity of projects, and

ensure proximity to the grid and/or

loads.

Auctioned items

Auctioned items can include:

• Energy i.e. kWh (in Mexico,

Brazil),

• Firm energy i.e. production

at a specific time of day (in

Mexico),

• Capacity in MW (Germany,

Thailand, Malaysia and

Indonesia),

• Budget (Netherland, UK),

• Green electricity certificates

(Mexico)

Auctioned items can be offered as a

single item or grouped together in a

multi-item auction.

Setting volume caps below the potential

market volume enhances competition,

which can lead to price reductions. South

Africa’s first auction (2011) was not very

successful in enhancing competition,

given that there was no capacity limit

attributed to this first phase except the

overall program volume, which meant

that the auction volume far outstripped

demand.



Remuneration or

Support Mechanism

Support or remuneration is

provided to RE projects

through long-term Power

Purchase Agreements (PPAs)

with one of two types of

remuneration or financial

support:

• Contract-for-difference

(CfD) with the successful

bidder:

• The support granted under

this contract is the difference

between the price with

which the successful bidder

was awarded (the strike

price) and the market price

for electricity (the reference

price). The remuneration

awarded under a CfD is

called a Feed-in-Premium

(FIP) and can be a sliding, or

with higher risks, fixed

premium on top of the

market revenues (e.g. the

Contract for Difference or

CFD in the UK). Most

European countries use

sliding premiums to limit the

revenue risk for RE

generators.

• Feed-in-Tariff (FiT)

• CfD and FiPs are dependent

on the existence of a

reference electricity

price (for example, a liquid

day-ahead electricity market

accessible to the RE

producer). When such a

reference price does not

exist, policymakers should

provide support in the form

of a guaranteed purchase at a

feed-in tariff, where the level

of the tariff is determined by

an auction. In such cases, the

terms of the support for a

given project can include

transitioning from the feed-

in-tariff to a sliding-scale

feed-in premium once an

easily accessible reference

price materializes.

Using standardized, long-term PPAs

with conditions known in advance by

bidders can lower risk premiums.

Moreover, making contract duration

compatible with the duration of the

typical financing maturity given by banks

can increase a project’s bankability.

Investor confidence can be enhanced

through different methods of sharing

financial risks related to exchange rate

and/or inflation that can impact income

throughout the contract period.

Offering a FiP to RE generators selling

directly into the wholesale energy

market ensures profitability of RE

generators and reduces the risks

associated with RE projects. The

premium ensures that RE generators

recover all their costs when market

revenues are insufficient or when

dispatch instructions diverge from their

dispatch schedule.

The CfD arrangement should be

symmetrical so that the RE producer

pays to the support provider the

difference if the reference price exceeds

the strike price.

Technology eligibility

• Technology-neutral

procurement (all

technologies can participate)

Technology participation rules

involve trade-offs in terms of cost,

competition and other auction



• Technology specific

procurement (only one

specified technology can

participate e.g. wind, solar,

storage, hybrid, distributed

generation, rooftop

installations etc.)

• Multi-technology

procurement (a specified

group of technologies can

participate)

outcomes.

Technology-specific auctions are

typically used to help provide the

foundation for nascent or non-

existent technologies to prove they

are viable and can compete in future

auctions. In addition to supporting

emerging technologies, technology-

specific auctions can help diversify

the generation mix, support the

development of local industry and

encourage diversity of market

participants. Specific auction design

catering to specific technologies

could have positive externalities

since pre-qualification requirements,

regulatory procedures and other

factors vary by technology. Tailoring

auction design for a single

technology could enhance auction

efficiency when technologies are at

different stages of maturity.

However, the absence of

competition between technologies

also reduces the chances of

achieving least-cost generation.

In technology neutral auctions,

all energy technologies and

resources compete directly with

one another. This can also include

demand-side resources like energy

efficiency and demand response,

which may bid into the market as

well (if they can demonstrate that

savings are achieved, or generation

is offset during peak periods). These

auctions increase the likelihood of

the development of least-cost

technologies, yet reduce or

eliminate government control over

which technologies are developed. If

held when technologies are not at

the same level of maturity,

technology neutral auctions can

sometimes lead to unintended

consequences.

While the dollar per unit cost of

electricity is likely to be higher in

technology-specific auctions, this

metric does not consider grid

integration costs according to

technology, local development

benefits, generation mix diversity or

resource adequacy. Accordingly, the

ideal mix of technology-specific,

multi-technology and

technology neutral auctions



depends largely on specific market

and societal needs.

Project size eligibility Auctions can be designed to

procure power from a specific

size of projects ranging from a

few kW to several MWs.

Implementing minimum project size

requirements has the potential to reduce

the transaction costs associated with

small bids, although potentially deterring

their participation, which may have

detrimental effects on competition.

Maximum size requirements can

encourage the participation of smaller

actors and help avoid market

concentration, but limit economies of

scale.

Frequency Annual, bi-annual etc. Continuity in the implementation of

auction rounds, as opposed to a "stop-

and-go" implementation, increases long-

term planning certainty for market

players. Auction frequency is context-

dependent and should allow regulators

to adjust according to perceived shifts in

market conditions.

A.4.3.2 AUCTION PROCEDURE


Auction format • Static Auctions: Also known

as sealed bid auctions.

Include first-price, second-

price, pay-as-bid and pay-as-

clear auctions. Most

countries use this auction

format.

• Dynamic Auctions: Also

known as iterative auctions.

Include ascending-clock (e.g.

the Netherlands) and

descending-clock auctions

(e.g. in Brazil)

• Hybrid Auctions: Multi-phase

auctions with a mix of at

least one static and one

dynamic phase (e.g. in Brazil).

The trend to implement static (sealed-

bid) auctions in many EU and non-EU

countries is due to their relative

simplicity and the regulator and

bidder’s familiarity with the sealed-bid

process.

Ceiling Price • Undisclosed ceiling price

(e.g. in South Africa and

Peru).

• Disclosed ceiling price (e.g.

in Brazil).

• Disclosed ceiling price

combined with undisclosed

auction volume (e.g. in

Mexico and India).

Disclosing ceiling price helps prevent

projects from being rejected in the

auction and gives bidders more

planning security (sunk costs).

However, in markets where

competition is low, disclosing ceiling

prices can result in all bids close to

the ceiling price.

Benefits:

• Control over maximum costs

protects government from high prices

in case of low competition.



• Cap increases budget certainty for

years in advance.

• Create price signal for market.

Challenges:

• Bids close to ceiling price if low

competition market distortion.

• Overly aggressive ceiling prices can

be distorting auction unattractive for

investors.

• Ceiling difficult to set if little

information.

Ceiling prices that define the

maximum possible support level limit

the risk of high support costs for

governments/consumers. Determining

appropriate ceiling prices remains

challenging and may involve relatively

high transaction costs.

In addition, when setting a ceiling

price, competition from other regional

markets and equipment supply bottle-

necks must also be accounted for. In

Denmark’s Anholt auction only one

bidder participated in the auction. The

lack of interest from other producers

was possibly due to financially more

attractive markets at the time,

especially in the UK.

Selection criteria Price only auctions:

Price is the only criteria.

Price only auctions are the

most common method of bid

evaluation in EU countries.

Multi-criteria auctions:

In addition to price, several

other criteria are considered

during bid- evaluation e.g.

locally produced

components, additional

environmental benefits,

suitable production profile,

grid connection costs and

locational distribution etc.

Most non-EU countries use

multi-criteria evaluation.

• A purely price-only selection process

is associated with lower support and

transaction costs, while the inclusion

of other criteria imposes restrictions

that might lead to higher costs and

decreased transparency.

• However, multi-criteria auctions can

also help promote social acceptability

and local economic development.

• The more transparent and

quantitative the criteria, the lower

the risk of collusion.

Pricing rule Pay-as-bid (also known as

the discriminatory pricing

rule): Pay successful projects

what is offered in their bids.

Most countries use the pay-

as bid pricing rule.

Pay-as-clear (also known as

the uniform pricing rule): All

Pay-as-bid has been the preferred

pricing rule in most EU and non-EU

auctions. Pay-as-bid tends to be more

robust against undesired, strategic

behavior than uniform pricing, despite

some advantages in auction theory. In

addition, and since it offers bidders no

more than their bid, this pricing rule



successful bidders receive

the same clearing price (e.g.

the Netherlands and UK)

usually finds high public acceptance.

The Pay-as-clear rule discourages

bidders from submitting unfeasible

bids and aggressive under-bidding.

Number of rounds • Single round

• Multiple, iterative rounds

• Administrative costs

• Institutional capacity

A.4.3.3 CONDITIONS FOR PARTICIPATION

Pre-qualification requirements (or setting conditions on who can participate in the auctions) are

applied in almost every country that has conducted RE auctions. Pre-qualification conditions help to

identify serious bids and sort out projects with low realization probability. Pre-qualification

requirements and conditions can favor larger, more established developers and prove prohibitive to

small developers. However, implementing low pre-qualification and penalty levels might attract

speculation and result in poor project realization rates.

Design Element Options Key Considerations

Timing of the auction

This refers to the

amount of preparatory

work that the bidders

are required to complete

before participating in

an auction. Countries

can, for instance, specify

whether bidders can

participate without any

preliminary site

assessment, land

acquisition or permits

(early auction) or

whether site and

resource assessments,

land and permits are a

prerequisite for

participation (late

auction).

• Early stage auction: Bidding

projects are in an early stage of

development i.e. bidders are

not required to provide

significant preliminary

assessment, proof of land

ownership or permits etc.

• Late stage auction: Participating

projects are in a relatively

advanced stage of development

i.e. preliminary planning and

approvals are in place. Late

stage auctions by definition

require significant lead time

between the auction

announcement and execution.

• If the auction takes place early in the

project development process, i.e. before

permits affecting the business case of a

project (depending on the country: land

lease, grid connection), the risk that the

project will be delayed or cancelled

increases.

• Conducting sufficient site feasibility

studies and procuring key permits before

the auction allows bidders to better

estimate costs and makes projects more

bankable.

• However late-stage auctions expose

participating bidders to additional

transaction costs. The number of agencies

and process involved in securing

approvals for instance has a critical impact

on the transaction costs developers must

face to participate in a late-stage auction.

Establishing a one-stop shop for

permits (e.g. Denmark) or auctioning

projects in designated renewable energy

zones (REZs) can reduce costs associated

with late stage auctions.

Prequalification

requirements

• Pre-qualification requirements

can include:

• Land rights secured or proof of

reasonable expectation.

• Experience implementing

projects of a certain size or

capacity.

• Audited financial statement for

last three years.

• Net worth of bidder at least

30% of project value.

Balance with financial requirements and

consider burden on bidder and risks.



• Disclosure of lines of debts.

Financial guarantees

Splitting financial guarantees

between commitment (bid

bond) and completion (project

completion bond).

Sufficiently high financial guarantees help

ensure seriousness of bid and project

completion.

Balance with technical requirements and

consider burden on bidder and risks.

A.4.3.4 DEADLINES AND PENALTIES

Risks should be allocated to the actor best able to deal with them. This would reduce transaction

costs for bidders and reduce the probability of non-realization, while issues related to project

development are probably better dealt with by the project developer.


Deadlines for

commissioning

projects.

Varies based on project scale

and technology type. Examples

include:

• South Africa: Approximately 2

years (1.5 years COD after

financial close + 0.5 years

financial close after contract

award).

• Germany: Solar PV - 1.5 years;

onshore wind – 2.5 years

• Mexico: 1.5 – 3.5 years from

auction announcement (all

technologies).

• USA-California RAM: 2 years

(all technology baskets).

• Project scale

• Technology type

• Location

• Existing infrastructure in the project

area and accessibility of project

location.

• Interconnection availability.

• Local content requirements.

Penalties Penalties imposed in case

project is delayed or fails to

comply with the requirements

stated in the PPA contract may

include:

• Enforcement of bid bonds or

financial guarantees.

• Support reduction.

• Reductions in support

duration.

• Unilateral contract

terminations in case delays

were not sufficiently justified

(e.g. in China).

• Exclusion of bidder from

future auctions (black-listing).

Benefits: Incentivize project

realization due to penalties.

Costs: Risk for bidders increases.

Prohibitive barrier for some (especially

smaller) bidders.

Next to pre-qualification requirements,

strict compliance rules help to ensure

serious bids, but they can also lead to

low participation and competition.

Lower penalties reduce the risk related

to construction delays and failure,

which could stimulate a higher number

of bids, but they do not encourage

project realization.

Striking a balance between pre-

qualification requirements and penalties

is therefore of key importance, as well

as adapting penalties to local

circumstances.

Case studies show that penalties are

not a guarantee for project realization.

Looking at penalties, reviewed schemes

also show the importance of

differentiating between delays caused by



the project developer or by external

factors (e.g. environment license or grid

connection).

Policymakers should closely monitor

potential loopholes or other factors

that could render penalties toothless.

Also, leaving room for legal dispute

about who caused the delays can block

project pipelines and prolong project

realization.

Settlement rules to manage production

deviations can help discourage

developers from systematically over- or

underestimating their generation

expectations. Setting up early warning

systems to identify delays at early stage

helps to constructively address delays in

a timely manner.

A.4.3.5 INSTITUTIONS


Identify the institution

running the auction.

Typically, a central procurement

body (‘the auctioneer’) will run

the auction on behalf of the

buyer of the electricity, also

known as the ‘counter-party to

the PPA’ or ‘support counter-

party’.

Which institution is best-placed to run

the auction?

What is the extent of technical or

capacity-building support required by

the designated auctioneer?

Identify the counter-

party to the PPA.

PPA counter-party (also known

as the support counterparty)

should be identified. This entity

will deliver support to RE

projects (acting as the ‘buyer’)

through a remuneration or

support level determined

through the auction process.

The PPA counter-party or

buyer could be a federal or

provincial entity (such as a

provincial distribution

company).

The support counterparty must be a

creditworthy entity, allowing projects

to raise financing at a reasonable cost

and the creditworthiness of the

counterparty must be maintained for

the full duration of the support or PPA

period.

Identifying other

institutions directly

or indirectly involved

in the auction

development and

implementation

process.

Organizations involved in

drafting the RFQ, RFP, PPA and

other contract documents or

providing technical assistance or

capacity-building support to the

institutions involved. These

institutions can include:

• Public sector organizations.

• Private sector organizations

(project developers, financial

institutions etc.)

• International development

• What are the roles of the different

institutions involved in the design of

the auction process? For example,

what is the role of the transmission

company in the transaction?

• What are the roles of different

institutions involved in conducting the

auction?

• Will the various institutions require

technical assistance or capacity-building

support?

• Are there any unnecessary institutional

or process overlaps that could delay



organizations. the auction or post-auction project

developing process (e.g. during the

permitting phase)?

• Can the number of institutions involved

in the auction and project development

process be reduced?

• What is the involvement of other

technical assistance agencies and

development banks so far?

• How is the exchange with the private

sector taking place? Have consultations

with the private sector on the

RfQ/RfP/draft PPA taken place or are

planned?

Identify institution

responsible for

evaluating auction

outcomes.

(See A.4.5 Below)

One or more government

entities that would review the

effectiveness of the auction

design to achieve a set of pre-

defined auction objectives.

The responsibility for reviewing the

success of the auction process,

documenting the lessons learnt and

adjusting the auction design or process

accordingly should ideally be assigned

during the auction design process and

before conducting the auction.

A.4.4 CONDUCT THE AUCTION

Activity Key considerations Responsibility

Drafting of required

documents. • Assess past experience with

energy auctions, if any.

• Assess utility of existing

procurement documents and

contracts for RE auctions.

• Assess capacity of institutions

involved.

• Identify capacity gaps.

Assign responsibility for individual

activities to the institutions involved in

the auction and establish a timeline for

monitoring progress. Although the

designated ‘auctioneer’ will have over-

all responsibility for conducting the

auction, other entities could

contribute to specific tasks within

auction implementation, e.g. market

building, preparing auction documents

(RFQ, RFP, PPA etc.), contracting with

the winning bidder and monitoring the

progress of the winning projects.

Assign responsibility to specific

organizations or government

departments for:

• Drafting of auction documents

• Market building

• Procurement conduction

• Contracting

• Monitoring of realization

Market building.

Procurement

conduction:

• RFQ

• RFP

• Awarding of bids

Contracting

Monitoring of

realization.


A.4.5 EVALUATE OUTCOMES

The effectiveness of auctions is measured by their ability to efficiently contract new RE capacity and

by project realization rates. Lessons learnt from the auction experience can be used to calibrate or

modify auction design elements or the implementation process for future auctions.


Evaluate the

effectiveness of the

auction to achieve

strategic objectives

or auction targets.

Static efficiency: Static

efficiency is achieved if a

predetermined target can be

fulfilled at the lowest possible

overall cost or at a lower cost

compared to ceiling prices or

previous (administratively

defined) support levels, such as

administratively defined FiTs.

Dynamic efficiency: In

contrast to static efficiency,

dynamic efficiency evaluates the

costs of target achievement over

the long-term and considers

whether a policy instrument

helps drive down costs of less

mature technologies. Overall, it

is more difficult to assess

dynamic efficiency because its

measurement requires longer

time spans.

Efficiency gains in countries like

California, Brazil and South Africa have

been impressive; Support levels in

California fell from USD 88.7/MWh in

the first round, to USD 78.62/MWh in

the third one. In Germany, the average

price of the first auction round was

USD102.27/MWh (min.: USD

94.57/MWh, max.: USD 105.16/MWh),

significantly below the ceiling price of

USD 125.91/MWh. In the second

auction, the price further declined to

USD 94.68/MWh.

More recently, Mexico achieved

$45/MWh, $32MWh and $20/MWh in

solar auction rounds 1, 2 and 3

respectively, while Kazakhstan

achieved $49/MWh, $45/MWh and

$44/MWh respectively.

Case studies show that there may be a

trade-off in the short-term between

high competitions and fostering

innovative RE solutions. However,

differentiation through technology-

specific auctions seems to be more

suitable due to the diversity it

promotes (both EU and non-EU

countries have some form of

differentiated support that reflects

technology-specific costs, whether in

the form of technology-specific or

multi-technology auctions). Evaluating

auctions based on both static and

dynamic efficiency therefore appears

useful.

Project realization rate: The

number of projects successfully

commissioned compared to the

number of projects awarded

bids.

Research shows that full project

realization is rarely achieved, and

delays are frequent. Auction schemes

in China, Denmark, and Portugal have

now commissioned 100% of

contracted capacities but not without

delays in some cases.

At least 75% of projects (whose

realization period has ended) in

California and South Africa have been

built. In Brazil, France, and Italy, less

than 50% of projects (whose

realization period has ended) have

been realized. Grid connection

problems have been an important



factor behind the construction delays

in Italy and Brazil.

Document lessons

learnt.

Document and inform

stakeholders of the lessons

learnt from the auction process.

The responsibility for reviewing the

success of the auction process,

documenting the lessons learnt and

adjusting the auction design or process

accordingly should ideally be assigned

during the auction design process and

before conducting the auction.

Adjust auction design

based on experience.

Adjust one or more elements of

the auction design (or adjust the

auction procedure) to improve

upon the results of the previous

auctions.


ANNEX B: ILUSTRATIVE COMPETITIVE RE PROCUREMENT PROCESS FOR

RE ---- BEST PRACTICES ADAPTED FOR PAKISTAN

(months)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

1 Inception Stage

a RE Grid Integration Study, Plan, and Approvals in place (pre-requisite)

b Clarity on competitive model for generation — on long-term contract and on take or

pay contract —CPPA-G market operator, aggregators least cost generation dispatch

(pre-requisite)

c Site selection and Federal/Provincial Approvals in place-(pre-requisite); Ensure siting

within project location that is well suited for operational success and guaranteed grid

access that is responsibility of government (pre-requisite)

d Choice of Technology and/or Quality Criteria

e Develop Concept Note in parallel to RFP (As per normal Pakistani process;

Decision/Approval in Principle to Conduct Auction; announce pre-feasibility already done

by AEDB)

f Announce intent to issue RFP and hold auction/s with sufficient notice (international

practice is at least 1 year in advance)

g Conduct a needs/options assessment — determine cost benefit, supply and demand, and

SWOT analysis to the extent possible in Pakistan (pre-requisite for RFP; no standard

process in Pakistan)

2 Due Diligence and Transaction Structuring Phase


1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

a Conduct viability/feasibility analysis (share existing documents) for potential projects

(both AEDB & bidders as relevant), including tariff structure, demand, RE grid integration,

etc.

b Develop market and affordability assessment (international best practice in deregulated

market; only applicable in competitive market environment post-2023 in Pakistan) done

by implementation agency (AEDB) Conduct customer assessment —willingness to pay,

ability to pay, inability to pay and 'safety-net' for customers (International; pre-requisite;

needs appropriate/modified documents)

c Approvals in place for taxation, subsidies, other incentives for RE RFP bidders

d Pricing rule (initial bid submitted or 'clearing price’; floor price consideration given excess

generation estimates, but concerns about windfall profits to beneficiaries) Currently not

applicable to Pakistan

e Decide Bidding Process Aims, Goals, and Strategies; Establish Demand

f If reverse auctions are chosen/allowed as per GoP rules, then as per international

practice, this may require development of Information Technology systems

g Determine minimum eligibility rules for bidders

h Design bidding format and auction design customized for local conditions: bidding

documents (share existing documents for competitive bidding), regulations, rules,

processes, procedures, schedule and timing of bids

i Determine billing and payment process

J Conduct environmental and social community assessment for underlying projects & get

necessary approvals

k Ensuring competition between new and existing resources —timing of bidding processes

+ length of contracts available

l Lead time — between bidding process & when capacity must deliver (give enough time

for different types of technology to develop)


1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

m Contract lengths and Standard PPAs/EPAs

n Timely dissemination of requisite project and auction information — how much

information to publish in advance of competitive bidding to reduce barriers to entry but

prevent collusion, and ensure competition

o Formal Announcement of intention to hold auction and call for EOIs, along with key

project and bidding mechanism/RE targets information (gauges market interest)

3 Procurement Stage

a Issue Preliminary Information Memorandum (PIMS) and invite queries (4-8 weeks) shows

demonstration of interest; GoP intent

b PIMS to be followed by Road Show

c Develop RFP, EPA and Implementation Agreement (review existing documents)

d Pre-qualification criteria and collateral rules (Feedback Loop; Financial, Technical,

Partners (what type of individual firms are allowed or only consortia etc.)

e Public outreach campaigns & publicity with media & local communities; Public feedback

(international best practice)

f Send draft RFP to NEPRA for approval

g Ensure consistency with PPRA/solicitation of PPRA comments

h Pre-Bid Meeting after EOI announcement

i Issuance of draft RFP (including security package and incentives for project developers

and penalties i.e. bid bonds, underperformance penalties, etc.; EPA/IA etc.)

j Post-draft RFP pre-bid meetings (provides useful feedback for finalizing RFP; 4-6 weeks

minimum for RFP issuance)


1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

k Finalize pre-qualification criteria based on market input

l Bidding process structure and bidding rules (Feedback Loop; procedures for determining

Short List, procedures for determining & launching Final Bid, procedures for determining

winning bid)

m Finalize RFP based on market input (including pre-qualification criteria for bidders and

discussion with bidders on EPA/IA))

n If any changes to draft RFP pursuant to pre-bid meetings, send revised RFP to NEPRA

and competent approval forum

o Final RFP (30 days response time minimum PPRA rules)

p Business plans and capacity in bid (TBD if viable in Pakistani context)

q Winner Selection rules, procedures, & process (Open meeting— envelopes are opened

in front of all bidders, etc.)

4 Bid Award Stage

a Risk mitigation & affordable financing mechanisms

b Issue provisional award letter/s

c Execution of security package and incentives for project developers and penalties (bid

bonds, underperformance penalties, etc.); EPA/IA etc.

5 Post-Procurement Stage

a Finalize Implementation Agreement after Award

b Financial close

c Monitoring, evaluation and enforcement procedures